Independent contractors have always existed, but in recent years, the gig economy has introduced even greater use of freelancers and other non-employees to help businesses get their work done. If yours is a business that has used an individual who does not fall under the category of being an official employee, and you’ve paid that person $600 or more during the calendar year, then you need to properly report your payment using Form 1099-MISC. Many businesses have made the mistake of skipping this step and failing to report this payment, but failing to report non-employee compensation (NEC) to an independent contractor or freelancer puts you in jeopardy of being subject to penalties and audits, as well as the risk of losing the ability to deduct what you’ve paid them as a business expense.
With the advent of e-filing, the Internal Revenue Service has recently had to adjust their filing processes for non-employee compensation. This is specifically because so many scammers were trying to take advantage of false claims regarding earned income tax credit (EITC). Where NEC 1099-MISCs were originally not due until the end of February, the agency moved the deadline up to the end of January. At the same time, they issued guidance saying that no refunds for returns would be issued until the NEC amounts that independent contractors were filing could be double-checked against the 1099s that were filed.
If you are responsible for filing 1099-MISC forms for your company for 2019, this means for you that those forms need to be into the government and to each independent contractor you paid no later than January 31st.
In the past, many businesses have found allowed themselves to be lax regarding record keeping for payments to independent contractors. It’s easy to fall into the trap of hiring freelancer in the first quarter of the year, paying them a few hundred dollars, and forgetting about the paperwork. Though this isn’t a big deal if that’s the only time you work with that individual, it can become a problem if you work with them again at the end of the year for another few hundred dollars. The new regulations demand that more careful attention be paid. As soon as your payments to that individual reach the $600 benchmark, your company is required to file the 1099-MISC, and if you haven’t asked them for a W-9, it may present a challenge. To protect yourself, it’s a good idea to get into the habit of asking every independent contractor to provide you with a copy of their W-9 the very first time that you use them. If they do not hit the $600 threshold then there’s no requirement to file, but once they do, you’ll be ready.
If you’re not familiar with the IRS Form W-9, Request for Taxpayer Identification Number and Certification, you can download a copy of it from the agency’s website. The information that it asks for is simple and collects all the necessary information from any freelancer or independent contractor. Not only does it make it easier for you to complete your filing obligation, but the simple act of requesting and obtaining the information provides evidence that you have tried to stay within the law. This is important because there are some unethical vendors who will provide false information in order to evade having to pay taxes on the monies that they receive. You do not file the W-9 with the IRS, but having a completed W-9 on record provides you with important documentation in case you’re accused of falling short of your filing obligation.
One of the reasons that you want to make sure that your record-keeping is in order is because, at $270 per failure to file by January 31st, 2019, the penalties can add up quickly. You can remediate the expense by filing a late return within 30 days of January 31st: doing so cuts the penalty to $50 per information return. If you go beyond the 30 days then you can still cut the penalty to just $100 as long as it is received no later than August 1st, 2019. The forms must be in the required format —either magnetic media or OCR (optically scannable forms.) There is also a requirement that any company that has to file 250 or more information returns use the electronic filing process.
The 1099-MISC is not strictly used for reporting payments to independent contractors. The same form is used for rent, royalties and other types of payments. The specific recording of payments to independent contractors occurs in the form’s Box 7. Though copy of the 1099-MISC has to be sent to the recipient of income by January 31st regardless of what the payment recorded, the copy that gets sent to the government has different deadlines dependent upon what the payment was for. The independent contractor payment is due by January 31st, as mentioned previously, while payments for rent, royalties or similar expenses are not due to the government until a month later, on February 28th.
Failure to file the 1099-MISC according to the government’s requirements can lead to unnecessary complications. Protect yourself from fees by speaking to an experienced tax professional to make sure that you are in compliance.
Bob Mason, CPA writes for CountingWorks, an accounting news and advice website. Reach his office at [email protected].
About Bob Mason, CPA
Santa Cruz based Bob Mason, CPA (Coast Financial Services) has been providing the people of Santa Cruz with years of expertise in the tax and accounting industry. He provides a broad range of accounting, bookkeeping and small business services to help your business succeed. Using their expertise in technology they have built an intuitive website with useful tools and calculators and a monthly blog which they post to on a frequent basis. Check back weekly for their next tax or accounting topic.
